Suppose your firm is considering investing in a project with the cash flows show
ID: 2768409 • Letter: S
Question
Suppose your firm is considering investing in a project with the cash flows shown as follows, that the required rate of return on projects of this risk class is 8 percent, and that the maximum allowable payback statistic for the project are three and a half and four and a half years, respectively. Use the MIRR decision to evaluate this project; should it be accepted or rejected? A. MIRR = 13.59 percent; accept the project B. MIRR = 7.96 percent; reject the project C. MIRR = 7.19 percent; reject the project D. MIRR = 12.58 percent; accept the project
Cash Flows:
0: -5,000
1: 1,200
2: 1,400
3: 1,600
4: 1,600
5: 1,100
6: 2,000
Explanation / Answer
Year Cashflows PV Factor @8% PV @ 8% Future Value at terminal year a c a*b 0 -$5,000.00 1.0000 -$5,000.00 1 $1,200.00 0.9259 $1,111.11 $1,763.19 2 $1,400.00 0.8573 $1,200.27 $1,904.68 3 $1,600.00 0.7938 $1,270.13 $2,015.54 4 $1,600.00 0.7350 $1,176.05 $1,866.24 5 $1,100.00 0.6806 $748.64 $1,188.00 6 $2,000.00 0.6302 $1,260.34 $2,000.00 $10,737.66 MIRR Future Value of Inflows can be calculated using Compound Interest Formula = P * [(1+r)^n - 1] Future Value of Inflows = $10,737.66 MIRR = [(FV of Inflow / PV of Outflow)^1/n] - 1 = [(10737.66/5000) ^ 1/6] - 1 = 1.135856 - 1 = 13.5856% or 13.59% Hence, the correct answer is Option A - MIRR = 13.59 percent; accept the project
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